Uncorking a Seventy-Four-Year-Old Bottle: A Toast to the Free Flow of Liquor Across State Borders

Prohibition’s repeal in 1933 ended an era of lawlessness, gang wars, and heavy-handed federal regulation. The state regulatory systems that arose from Prohibition’s ashes, however, brought problems of their own. Most states adopted distribution systems designed in part to shield in-state producers, wholesalers, and retailers from out-of-state competition. In this piece, I examine one such widely enacted protectionist state law: the personal import limit. I argue that these limits, which survive essentially unchanged to this day, are inconsistent with the premises of an integrated national market and frustrate the purposes of the Twenty-First Amendment.

Suppose you are a Connecticut resident living in Hartford, and you wish to throw a New Year’s Eve party. Imagine also that a liquor store in Springfield, right across the Massachusetts border, is hosting a sale of champagne. No store in the Hartford vicinity has cut prices. Though you would naturally take advantage of the lower prices in Massachusetts, section 12-436 of the General Statutes of Connecticut stands firmly in your way: unless you wish to risk a fine of “not more than one thousand dollars” or imprisonment of “not more than one year” (or both), you may not import more than five gallons of alcohol from out-of-state. However, you may purchase and transport within Connecticut unlimited quantities of champagne from a Connecticut retailer. This is so because Connecticut employs a “three-tier distribution system,” meaning that Connecticut alcohol producers may sell only to Connecticut wholesalers, who may sell only to Connecticut retailers, who may then sell only to consumers. The system allows the state to regulate every drop of alcohol that enters its borders. Because a Massachusetts retailer does not participate in Connecticut’s three-tier system, the state of Connecticut bars the Massachusetts retailer from full access to Connecticut’s liquor market.

Such statutory schemes are hardly exceptional. At least thirty-two other states, plus the District of Columbia, have similar ones. Artifacts from the age after the repeal of Prohibition, these three-tier distribution systems and personal import limits are typically justified in terms of the states’ “‘core interests’ . . . in ‘“promoting temperance, ensuring orderly market conditions, and raising revenue’” through regulation of the manufacture, distribution, and sale of alcoholic beverages.” Although statutory schemes like these normally trigger the prohibitions of the dormant Commerce Clause, the states justify the regulation of alcohol under the Twenty-First Amendment, which provides: “The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” The states insist that “the laws thereof,” as used in the Twenty-First Amendment, refer to any laws, even discriminatory ones, and that the Amendment displaced, or at least limited, the nondiscrimination principle of the dormant Commerce Clause. They also point to a string of Supreme Court cases declaring the three-tier distribution system “unquestionably legitimate.” To strike down the personal import limit, say the states, is to destroy the three-tier system.

Wine enthusiasts will remember (with reverence) the groundbreaking 2005 decision of Granholm v. Heald, which struck down New York and Michigan laws prohibiting the direct shipment to consumers of wine from out-of-state producers. But so far, no court has extended Granholm to forbid the sort of discrimination against retailers that personal import limits produce. Indeed, the lone court of appeals decision to address a personal import limit upheld the state regulation. In Brooks v. Vassar, several wine lovers challenged Virginia laws that barred the personal importation of more than a gallon of alcohol at a time. In Granholm,the Supreme Court had barred unequal treatment of out-of-state and in-state alcohol producers, reasoning that the “[Twenty-First] Amendment did not give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods, a privilege they had not enjoyed at any earlier time.” A state could not allow in-state producers to ship alcohol directly to consumers while preventing out-of-staters from doing so. The plaintiffs argued that the same reasoning applied to discrimination against out-of-state retailers.

Nevertheless, the majority opinion inexplicably upheld the Virginia laws as part of Virginia’s “import regulation.” In a section of the opinion with which neither of the other judges on the panel concurred, however, Judge Niemeyer drew a clever distinction between discrimination against producers and discrimination against retailers. His tightly logical argument went like this: Under the Twenty-First Amendment, a state may choose to adopt a three-tier system. If it adopts one, the state may require that all alcohol consumed within the state pass through that three-tier system, regardless of whether it was produced in-state or out-of-state. Thus a state may choose between requiring out-of-state and in-state producers alike to funnel sales through the state’s three-tier system, or allowing all producers to ship directly to consumers. The same reasoning applies to out-of-state and in-state retailers.If the state employs a three-tier system, retailers may sell only alcohol that they have received from a licensed in-state wholesaler.

But here’s the rub: an in-state retailer qualifies, since it has received its alcohol from an in-state wholesaler. But an out-of-state retailer has not purchased its alcohol from an in-state wholesaler, meaning that the out-of-state retailer does not participate in the state’s three-tier system. Liquor purchased from an out-of-state retailer and transported into the state is therefore bootleg, unregulated liquor. The personal import limit prevents this bootleg liquor from threatening the integrity of the state’s three-tier system. Discrimination against out-of-state retailers is an unavoidable, necessary side effect.

So far, only the Fourth Circuit has addressed the constitutionality of personal import limits. Litigation involving state alcohol regulations continues to bubble throughout the country, however, and so it may only be a matter of time before the issue hits center stage. When it does, the Supreme Court should grant certiorari and reject the Fourth Circuit’s reasoning. By upholding an absolutely impermeable three-tier system, the court misconstrued the original intent of the framers of the Twenty-First Amendment, authorizing a protectionist regime that is inconsistent with the premises of a national market and that guts the substance of the dormant Commerce Clause. In the real world, personal import limits hamstring out-of-state liquor retailers’ attempts to access in-state markets, giving in-state retailers a leg up on the competition. These laws, as Justice Kennedy wrote in the majority opinion in Granholm, are “essentially the product of an ongoing, low-level trade war.”

I propose an alternative interpretation of the Twenty-First Amendment that takes seriously the states’ legitimate interests in regulating the sale of alcohol, accords with the original understanding of the framers of the Amendment, and prohibits states from erecting trade barriers. Put simply, if a state chooses to allow the sale of alcohol, it should be allowed to regulate sales within its borders as it pleases, but should not be permitted to restrict out-of-state sales. In other words, a state may require that all liquor purchased within its borders pass through the three-tier system, but it may not mandate that all liquor consumed within its borders pass through the three-tier system. Thus a state may not erect barriers to commerce by barring the importation of liquor, but may regulate alcohol sales once the liquor enters its borders. In practice, this interpretation would render personal import limits unconstitutional, but would preserve the constitutionality of a slightly diluted form of the three-tier system.

This approach is consistent with the Twenty-First Amendment’s legislative history. In 1933, the forces advocating Prohibition’s repeal protested the nationalization of prohibition. They endorsed a return to the patchwork of dry and wet states that had existed prior to the passage of the Eighteenth Amendment. Section 2 of the Amendment was accordingly (and uncontroversially) designed to allow each state to choose for itself whether to allow or forbid the sale of alcohol. During the debates in Congress, Senator Blaine “proposed to write permanently into the Constitution” a provision assuring “the so-called dry States against the importation of intoxicating liquor into those States.” Senator Wagner endorsed Section 2 as well: “[I]f the dry States want additional assurance that they will be protected I shall have no objection.” Another senator did “not wish to ask the Senate to put itself in the position of denying any measure of protection to dry territory.” Other senators voiced similar sentiments. Nothing in the Amendment’s legislative history suggests that Congress endorsed discriminatory state laws, and indeed commentators at the time questioned the idea that states were now free to discriminate against the products of their sister states: “Very few legislators thought that [the Twenty-First Amendment] meant absolute control over liquor and a reassertion of the theory of States’ Rights in an extreme and unique form.” If the framers had intended to gut such a longstanding fixture of the constitutional landscape, surely they would have said so explicitly.

Interpreting the Amendment in this way also accords with the first principles of an integrated national market. The modern patchwork of beggar-thy-neighbor policies employs the threat of criminal penalties to divert consumers to in-state retailers, regardless of price differences. Blocking access to out-of-state sellers also allows states to increase their own tax revenues artificially. Such results are inconsistent with our national market, which should operate on principles of comparative advantage rather than legal compulsion. And as any economist will testify, beggar-thy-neighbor policies have overall depressing effects on markets, ultimately injuring even their proponents.

The Twenty-First Amendment should operate in precisely the way its framers intended. States should be free to ban alcohol entirely. But if they choose to allow the sale of alcohol, they should be required to regulate it in nondiscriminatory ways. The Constitution should not be construed to authorize precisely the harms that the dormant Commerce Clause forbids. Once these archaic trade barriers come down, wine enthusiasts can begin to celebrate with gusto.